Archive for February, 2011

California Gov. Jerry Brown is proposing extraordinary revenue- raising plans to tackle the state’s $28 billion budget deficit. The Brown Administration has proposed that the state dissolve the state’s community redevelopment agencies (CRAs), regional quasi-public bodies charged with administering redevelopment dollars. Tax increment financing (TIF – the mechanism through which redevelopment is funded) is an enormous expense in California, representing $5.8 billion in diverted tax revenues a year. The current proposal would retire current redevelopment debts with agencies’ existing funds, allowing the $1.7 billion to be applied towards the state budget. Remaining funds would be returned to local governments and school districts.

Unlike the Enterprise Zone program, also slated for elimination by the Brown Administration, redevelopment in California actually does provide some clear benefits to the state. TIF plays a significant role in providing affordable housing in California: twenty percent of all TIF revenues must be set aside for affordable housing projects. When properly harnessed, redevelopment can spur equitable revitalization. Some of the most successful community benefits agreements in the country come from Los Angeles, where LAANE and other organizations have leveraged redevelopment funds to provide good jobs and affordable housing to underserved communities. Madeline Janis, executive director of LAANE, Vice Chair of the Los Angeles CRA Board, and board member of Good Jobs First has argued that reform – not elimination – of CRAs is the best way to advance economic recovery in the state.

Reform would help to address the overuse of redevelopment dollars in California. A February report by the Legislative Analyst’s Office found that CRAs in some counties have created so many projects that more than 25 percent of all property tax revenue is allocated to the agency. One needs to look no further for examples of irresponsible use of TIF funds than San Jose and Oakland. Both cities are scrambling to assemble and approve new subsidized professional sports stadium plans before the state can move to recapture redevelopment funds. Cities throughout California are moving decisively to spend or otherwise encumber their accumulated redevelopment funds.

California’s $28 billion budget gap is unparalleled, but budget pressures are bringing tough love to the economic development-industrial complex around the country. Getting back to basics is critical. Programs that pay companies to do what they would have done anyway – that fail to meet the definition of the word incentive, that don’t correct market failures – are deservedly vulnerable. It’s only fair, given deep cuts being proposed for aid to children, seniors, students and the unemployed.

Well before Wisconsin Gov. Scott Walker began his unholy crusade, the Right was heavily promoting its claim that public employee unions are a threat to the public. The title of a 2009 book by conservative ideologue Steven Greenhut said it all: Plunder! How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation.

What the union bashers are trying to obscure is that public employees have a long history of supporting policies that promote the broad public interest. This goes back to the very roots of the public employee union movement.

In the 1890s teachers in Chicago created a federation that became the first real teachers union and one of the pioneers of public employee unionism in general. When the federation, led by Margaret Haley and Catherine Goggin (illustration), was confronted with a move by the board of education to cut teacher salaries because of a purported fiscal crisis, the teachers responded to the claim of a revenue shortfall in a creative way. They launched an intensive investigation of tax dodging by some of the largest corporations in the city, finding that property tax underpayments amounted to some $4 million a year (serious money back then).

Tax officials were reluctant to crack down on powerful business interests, so the teachers sued, eventually winning a favorable ruling in the Illinois Supreme Court (though the U.S. Supreme Court later went the other way).

A cynic might say that the teachers were simply acting in their self-interest by finding a new revenue source that would help restore their lost wages. Yet their goal was also to find funds that could improve conditions in the schools—and those conditions were truly abysmal. In his 1975 history of the American Federation of Teachers, William Edward Eaton writes that in the 1890s:

The teachers of Chicago daily faced the horrors of overcrowded, unsanitary buildings stuffed with too many children and controlled by an impersonal bureaucratic structure. This they did with poor pay, no job security, and no pension system.

The efforts of teacher organizations to address these problems, through collective bargaining as well as tax justice campaigns, also redounded to the benefit of the students and their families.

The Chicago teachers were also an important force in the passage of the Illinois Child Labor Law of 1903. That cynic might say this was aimed at boosting school enrollment and increasing the demand for teachers. Maybe so, but can anyone deny that banning child labor was also a boon for society as a whole, aside from sweatshop proprietors?

In the decades that followed, unions of teachers and other government employees have been among the strongest advocates of a vibrant public sector. They have continued to be leading critics of corporate tax dodging and opponents of efforts to gut public services. Unions such as AFSCME have been at the forefront of campaigns to stop the contracting out of government functions and the privatization of public assets such as highways—practices that usually work to the detriment of taxpayers as well as public employees.

The state and local public employee unions accomplished this against all odds. Denied the protection of the National Labor Relations Act, they had to get states one-by-one to recognize their right to organize—the right that is at risk in Wisconsin and elsewhere. It took a period of remarkable militancy in the 1960s and 1970s—including defiance of laws banning strikes by public employees—before they made significant progress. Among those strikes was the 1968 walkout by sanitation workers in Memphis, where Martin Luther King Jr. was visiting to show his support when he was assassinated.

And even then there were often severe fiscal limits on the ability of public employees to bargain for substantial wage gains. To compensate, many public unions put more emphasis on securing better retirement benefits for their members. These pension rights—in effect, deferred wages—are now under attack as if they were some giant giveaway.

The real giveaways are the lavish business tax cuts and corporate subsidies that the likes of Gov. Walker promote at the same time that they are demanding severe concessions from government workers. The great confrontation of 2011 comes down a question of whose interests are more closely aligned with those of the public at large: those who teach our children, drive our buses and put out fires in our homes—or superwealthy individuals and large corporations that are reluctant to create new jobs.

With each passing day, the momentum is moving in favor of the descendants of the 1890s Chicago teachers who are fighting for their rights and for the public interest in Madison, Columbus and other capitals across the nation.

Note: A new movement called US Uncut is organizing actions around the country calling for a crackdown on corporate tax dodging as an alternative to harmful cuts in government programs such as education.

Walmart’s U.S. operations deprive state and local governments of more than $400 million a year through a variety of tax avoidance schemes, according to a report released today by Good Jobs First, a non-profit, non-partisan research center based in Washington, DC. The report, Shifting the Burden for Vital Public Services, is available at no cost on the Good Jobs First website at www.goodjobsfirst.org.

“Walmart likes to claim that its stores are an economic boon to local communities,” said Philip Mattera, research director of Good Jobs First and author of the report. “But the fact is that the company tries hard to reduce the revenue stream going to state and local governments.” Walmart does this, the report notes, through methods such as the following:

seeking lucrative property tax abatements, tax increment financing, infrastructure assistance and other forms of economic development subsidies that in recent years have amounted to roughly $70 million annually;

using gimmicks such as deducting rent payments made to itself (through a captive real estate investment trust) to avoid an estimated $300 million a year in state corporate income tax payments;

using an army of lawyers and consultants to systematically challenge its assessments and chip away at its property tax bills, costing local governments several million dollars a year in lost revenues and legal expenses; and

taking advantage – to the tune of about $60 million a year – of those states that fail to cap the “vendor discounts” they provide to large retailers for collecting sales taxes from their customers

“These practices are not illegal,” notes Good Jobs First Executive Director Greg LeRoy, “but taken together they deprive state and local governments of a sizeable amount of revenue desperately needed for vital public services such as education and public safety.”

Shifting the Burden for Vital Public Services is a synopsis of a series of reports previously issued by Good Jobs First on Walmart’s practices regarding economic development subsidies, property taxes and sales taxes, along with a review of research on the company’s state corporate income tax avoidance. It also contains updated information on those practices.

Largely lost in the partisan bickering over the stimulus has been the law’s enormous positive impact on improving government transparency. The American Recovery and Reinvestment Act of 2009 (ARRA) is not just the most transparent federal spending bill in U.S. history—the changes it pioneered will endure even after the stimulus winds down.

By now, many curious Americans have explored spending and job-creation on ARRA projects in their communities at recovery.gov. About 35 percent of ARRA funding is revealed there: every grant, loan and contract. And the reporting extends beyond the primary recipient one level down to sub-recipients. But few people noticed that the Office of Management and Budget applied that extended reporting to the main federal disclosure website USAspending.gov (created thanks to a bill championed by then-Senator Obama).

Even fewer people noticed that the quality of ARRA data improved greatly in October 2010: we can now trace the money as it changes hands three times, instead of two, to sub-sub-recipients. For people concerned about companies tied to political contributions, offshoring of jobs, violations of workplace laws, etc., this deeper data is a potential gold mine for accountability.

In a little-noticed provision, the Recovery Act also required privately-held companies that do a large share of their business with the federal government to reveal the compensation of their five highest-paid executives. We blogged about this when the first round of data came out, revealing executive pay at the high-profile “Beltway Bandit” consulting firm Booz Allen Hamilton.

The Recovery Act has also enabled a side-by-side analysis of transportation spending—comparing job creation from highway-building versus public transportation—that was simply not possible before: apples-to-apples data did not exist. However, in early 2010 Smart Growth America, the United States Public Interest Research Group and the Center for Neighborhood Technology issued “What We Learned from the Stimulus,” finding that transit construction creates 84 percent more work-months than does highway-building. That reinforced our own 2003 finding, in “The Jobs Are Back in Town” that smart growth creates more work for Building Trades union members than does sprawl.

ARRA data and the mapping functions at recovery.gov have also encouraged more people to think about the geographic distribution of government spending (one of our pet peeves here at Good Jobs First). For example, the Voices of California Coalition examined ARRA spending by local jurisdiction and found many hard-hit communities getting little if any dollars and jobs.

In New York City, Community Voices Heard coupled ARRA jobs data along with data from the local public housing authority and its own door-to-door survey work to prove that, despite HUD Section 3 rules intended to ensure that public housing residents get job opportunities when their residences are rehabilitated, very few ARRA-funded jobs went to New York City Housing Authority residents. See “Bad Arithmetic.”

In Texas, the Center for Public Policy Priorities reported on that state’s performance on weatherization spending and Policy Matters Ohio mapped where clean energy jobs were created, finding they were “well targeted to areas of economic distress.”

Finally, we here at Good Jobs First have closely monitored how state governments have mirrored Uncle Sam’s ARRA transparency boost, publishing two “report card” studies on state government Recovery Act websites. Every single state put up such a website—even though they had no legal obligation to do so!

Of course, the states did have more obligations than anyone else to provide ARRA jobs data, since so much of the money flows through state agencies, making them primary recipients. So it was no exaggeration to call ARRA “a giant crash course on disclosure for state governments.” And lo and behold, in December 2010 when we revisited the issue of how well state governments disclose their own spending for job creation, we found the number of states naming names online had jumped from 24 to 37.

As those who follow Good Jobs First know, since 2000 we have issued several studies mapping the geographic distribution of company-specific economic development subsidy deals—and then analyzing them for their pro-sprawl bias.

We are proud of the methodology we pioneered in creating these studies and have freely given away our data and advice to others seeking to replicate the work. These studies were tedious: we obtained lists of subsidy deals using state Freedom of Information laws and then spent months either obtaining street addresses or cleaning up the addresses provided.

So we are glad to announce new progress: in their online disclosure websites, states are increasingly including the street addresses of economic development deals. More than $3 billion per year among 15 states is now geocodable!

To be sure, the ease with which these street addresses can be copied or downloaded varies a great deal. But the truth is: it is becoming easier than ever to map where states and cities are subsidizing the creation or retention of jobs. And once you have project sites mapped, you can juxtapose them with numerous criteria like those we have used: poverty, race, tax-base wealth, population density, whether the worksite is served by public transportation, whether jobs are being created in communities hardest hit by plant closings and mass layoffs, etc.

Here, derived from our recent study, Show Us the Subsidies, are the state economic development programs we found with street addresses online:

Facing a budget hole estimated at $28 billion, the administration of California Gov. Jerry Brown has proposed program cuts that have economic development officials panicking. The Enterprise Zone program, which subsidizes in-zone businesses with hiring tax credits, deductions, and exemptions, is a prime target for revenue-starved California.

The program’s history is controversial. A host of research has thoroughly debunked the claim that EZs have a significant impact on job creation. (See the Public Policy Institute of California, whose study we covered on this site in 2009; the state Legislative Analyst’s Office in March 2010 and again this year; and most recently, the California Budget Project.) In its February report, the California Budget Project describes a number of troubling aspects of the program:

The cost of EZ tax credits and deductions has increased by 35% per year on average since its inception.

70% of EZ tax credits to go corporations with assets of more than $1 billion.

The EZ hiring credit does not require the creation of new jobs (many recipients simply relocate jobs).

Only one study has been released in recent years in defense of the EZ program. A 2009 study released by USC’s Marshall School of Business reported favorably on the economic effects of the program. (This study is not available online.) It was rebutted by Robert Tannenwald, then a Senior Fellow at the Center on Budget and Policy Priorities, who stated that the study’s findings “fly in the face of empirical evidence and economic theory.”

Whacking the EZ program would save the state $343 million this year. That figure increases to $600 million annually in just two years’ time. Elimination of a program that has negligible impact should be an easy decision for the state legislature. These funds would be better spent in an economic development program with a proven track record.

It has come to our attention that certain interests advocating “Right to Work“ legislation in some states are citing a 1975 study by a consulting firm known as Fantus, claiming it proves that states with such a law have a “better business climate.”

Aside from the intellectually dubious idea of quoting a 36 year-old study about anything, given how much the U.S. economy has changed over that time, and not to mention that only seven percent of private-sector jobs in this country are unionized, those making this claim about the 1975 Fantus study are just plain wrong.

First, the study cited was actually only one third of a 50-state comparison study; the other parts of the study rated the states quite differently. Second, Fantus refused to repeat the study and one of its executives correctly ridiculed “business climate” studies as “a Trojan horse for a certain ideological position.” Third, paid by state manufacturers associations, the Chicago accounting firm Grant Thornton picked up the work, but its methodology was discredited in 1986 by economic development experts and it also abandoned the work.

Below is an excerpt from my 2005 book The Great American Jobs Scam (Chapter 3, pages 79-83) (Berrett-Koehler Publishers) which details this history. You can see the whole book free online here or buy it on sale for just $7.98 here.

“Business Climatology” and the Second War Among the States

By the time [Fantus founder Leonard] Yaseen retired in 1977, a new term had started to take root: “business climate,” and Fantus helped define it to serve corporate financial interests. The term was often invoked in ways that reflected rising regional tensions. The Rustbelt was beginning to show its tarnish and the Sunbelt was booming. In the early 1970s, the populations of some states in the South and Southwest grew at 6 to 10 times the rate of the Northeast and Midwest.

Business Week declared “The Second War Among the States.” “The nation’s disparate economic growth is pushing the regions towards a sharp conflict” that “will take the form of a political and economic maneuver,” it warned. Major articles also ran in Fortune and the National Journal; the latter suggested that federal spending was also biased against the Rustbelt. A new Northeast-Midwest Congressional caucus was formed to address regional injustices.29

Public officials were looking for explanations about the growth disparities, and Fantus supplied one, shaped to serve corporate lobbyists. In 1975, Fantus authored the first 48-state “business climate” study, commissioned by the Illinois Manufacturers Association. Copies of the study itself may not survive, but a business publication reproduced the study’s key data: Fantus rated Texas #1, followed by Alabama, Virginia, South Dakota and the Carolinas. Only one Northern state, Indiana, made the top 10. New York, Yaseen’s nemesis, came in last.30

The very term “business climate” is brilliantly vague. Because the needs of different businesses vary so much, one size cannot fit all. And technology changes how work is structured, so the concept is always evolving. But the publicly understood version of “business climate” that was first established by corporate interests was a selective, politicized one. It remains an ambiguous, malleable term readily available for corporate use. Are we talking about the corporate income tax rate here, or is it how “business-friendly” people are, or how loose environmental enforcement is, or how generous the property tax abatements are? Companies and their lobbyists can always decide which part of the “climate” matters most today and whale away on it, insisting that if companies don’t get their way, the area has a “bad business climate.” Since the real decision-making process remains a black box, public officials have no way to judge such claims.

The Fantus/Illinois Manufacturers Association study was a highly political document. In both the way it was structured and the way it was reported, it apparently exaggerated the importance of taxes and unions. It actually ranked the states based on three groups of criteria: “population characteristics” with 8 underlying factors, “quality of life” with 10 factors, and “business legislative climate,” with 15 factors. However, the business legislative climate rating got the most attention; it included various corporate and personal taxes, per-capita debt, union regulation (whether a state was “right to work” or had a state labor relations board) and other factors (not reported). So even though Minnesota came in #1 for quality of life and #5 for population characteristics, it was rated #41 for business climate. And Alabama, ranked #47 on quality of life and #42 on population, was rated #2 for business climate.31

Fantus declined to perform the business climate study again after issuing the 1975 report.32 The Conference of State Manufacturers’ Associations (COSMA) hired the Chicago-based accounting firm of Alexander Grant & Co (later named Grant Thornton) to pick up the job. Starting in 1979, Grant Thornton issued the ratings annually. Like the original Fantus study, the Grant Thornton studies generally rated states in the South and the Plains as having the best business climates. Despite profound methodological flaws and political biases, the studies received broad media attention.33

Even Fantus became an articulate, though seldom-quoted, critic of the COSMA/Grant Thornton studies. “These surveys do a lot of harm” and are not a good basis for changing public policies, said Fantus vice president Charles Harding. He called them “a Trojan horse for a certain ideological position” because they are based upon business executives’ opinions, not economic statistics. “Is there any empirical evidence that a high level of welfare expenditures is inversely proportional to the business climate?” he asked. And in a consulting report to a state, Fantus referred to “the popular generic study that purports to rank state business climates” and a “poorly conceived generic study.”34

Grant Thornton’s business climate ratings system was finally dissected and demolished in 1986 by a major study authored by the Corporation for Enterprise Development (CFED), a non-profit think tank, and two other groups. Taken for Granted: How Grant Thornton’s Business Climate Index Leads States Astray cataloged a series of omissions and biases that made the studies misleading and largely invalid.35

For example, CFED explained, the index punished states that had good jobs. By giving negative weight to states with the best wages, Grant Thornton was penalizing every state that had lots of high-skill factory jobs, since those pay well. So even though a state must have been attractive for manufacturers to land a lot of good jobs, in the ratings, that was a negative. Two of Grant Thornton’s labor cost factors had to do with unions, but neither accounted for higher skills or lower turnover in union shops. A key factor used to measure productivity was botched; it measured capital intensity or low wages instead. The index over-weighted energy costs and ignored key issues like access to capital and quality of life.

The index was also blatantly anti-tax and anti-social safety-net. Despite the fact that state and local taxes are a tiny business expense, 5 of the 22 factors Grant Thornton used were tax and budget issues. However, only one of them measured what states did with their revenue, and then only to give a negative weight to welfare spending. Nothing else that employers and taxpayers get for their money was counted: not the quality of infrastructure, education, training, recreation, public safety or cultural amenities. Four more factors had to do with workers’ compensation and unemployment compensation, which are among the smallest of business taxes, but are common hot-button issues for manufacturing lobbyists.

Not only did Grant Thornton use poorly-chosen and biased data as the foundation of its ratings, CFED found, but it then put the numbers through a weighting process that made the results completely subjective and political. It sent the list of the 22 factors to the state manufacturing associations and allowed them to allocate 100 points among the factors, based on their beliefs about the relative importance of each. The responses were then averaged and weights assigned. So if a state association was in a big fight that year about workers’ comp rates, it might assign high weights to those two factors – even though there was no evidence that workers’ comp rates was having any effect on jobs.

Basically, CFED concluded, the Grant Thornton index was at best a very crude measure for a tiny share of companies: only manufacturers, and more specifically, only manufacturers in mature industries with low profit margins who are most sensitive to costs such as labor and are looking to site a branch plant. It didn’t really apply to the much larger service sector, or to what we today call the New Economy: high technology, life sciences/biotechnology and other knowledge-intensive industries.

Borrowing Oscar Wilde’s witticism about cynics, the CFED study concluded that the “Grant Thornton index knows the price of everything, but the value of nothing. It emphasizes the costs of labor but not its productivity. It calculates the expense of government but not its benefits.” In short, the Grant Thornton index that dominated public perceptions of the states’ attractiveness to business from the late 1970s to the late 1980s (when it ceased) was anti-tax, anti-public goods, anti-social safety-net and anti-union. Besides receiving national media coverage each year, the ratings were recycled in lobbyists’ testimony, fact sheets and newsletters. After the CFED study was issued, Grant Thornton revised its methodology, issued a few more reports, then ceased.36

CLAWBACK.ORG – A Blog of Good Jobs First

Clawback: a step taken by a government to recoup subsidies paid to a company that does not fulfill its job creation promises. Here we also deal with clawing back in a broader sense: making economic development serve the common good rather than narrow private interests.